Essentially rollover% is an indication of how much % of positions is getting rolled over to the next month ( be it long or short) .. and a higher rollover% indicates that the base direction for the next expiry action is set strongly by the bulls/bears prior to its beginning itself.

And whether the price trend reversal will be up or down can be seen clearly by a positive/negative or a change in the rollover cost which essentially in the price of next month future – current month future expressed as a %percentage premium/discount

So wondering how the rollover% and especially the rollover cost works out during the expiry / rollover week and what it gives a hint of ?

Well, what better way to showcase it in various scenarios than through a single ‘selfie’ to understand pic –>

the mystery behind rollover costs

the above pic is is for a month trend.. to see expiry day trend you can choose daterange as ‘1d’, so that you can see if there are any last day rollcost changes/reversals happening in long/short buildups , indicating where the buy/sell pressure is taking place.

to see what how you could have made money on the last trading day of the expiry see this example–>

I like to see stocks which are near their high /low range . And not only in terms of price , but also other F&O parameters, especially Open Interest (OI) and Delivery.

Why ? because OI itself is like a pressure cooker, there is a limit to how high can it go, and at the tipping point either the bulls or the bears will eventually give in, and the price would flow in the reverse direction. And if coupled with high delivery volumes, it is like a sure shot .

But how do identify if these parameters are near their high/low ranges from so many F&O stocks in a quick & easy way? For this the “Ranges” screen in the MyFnO app comes real handy.

The trick of finding such stocks is shown in our one-page pic –>

NOTE: I personally like to choose ‘percentile‘ form of data as that gives me how many % of times the value has been below the current value

Open Interest (OI) : in simple terms, this is the net number of long/short positions outstanding at any given point of time. For each buyer of an F&O contract there must be a seller.

From the time the buyer or seller opens the F&O contract (call/put/future) until the counter-party closes it, that contract is considered 'open'.

A large open interest indicates more activity and liquidity for the contract. The more the buildup the heavier the counter becomes, and depending on who comes out stronger, the bulls or the bears, the price follows.

Basis (premium/discount) : is the difference of the Future price over the underlying spot price. It essentially is a bullish/bearish indicator of whether the buyer is willing to pay extra premium & expects the price to rise in future, or whether the short-seller is selling at a discount thinking the price is going to fall in the future. When expressed as a percentage it is called the basis% and is calculated as

basis% = 100*(future-spot)/spot.

CoC (cost of carry) is nothing but the basis computed in annualized terms, as good as the rate of interest for carrying the position forward.

Coc=(basis% *365) / (days-to-expiry)

Near (1), Next (2), Far (3), Long (4) : the data for the 3 month’s series we can see break up as

Rollover : is a close estimate of how many future positions are actually being carried over to the next month series, (but no one actually knows the actual figure, it is just a notional assumption). The formula we use is :

RollCost: is essentially the difference in the next & current month ‘Futures’ price only i.e. the premium/discount the buyers/sellers are willing to pay to roll their positions to the next month. A positive rollcost generally indicates that a bullish position is being rolled or built for the next month and a negative rollcost indicates a bearish one

RollCost% = 100 * (Price_Next(2) - Price_Near(1) )/ (Price_Near)

Implied Volatility (IV) : in simple terms it is how much volatility the market is expecting in the future ( vis-à-vis the Historical Volatility HV which is calculated from the past price movements). A higher IV means people expecting a lot of volatility & are thus willing to pay a higher price / premium in options to protect their interests. A lower volatility means people are getting comfortable with current market scenario. For IV we use black-scholes formula to calculate IV for each strike, using futures price for underlying & zero interest rate ( since all are European options). Then we apply a volume-weight and calculate overall IV of a symbol through a volume-weighted avg of IVs across strikes to arrive at one common IV for that stock/symbol i.e.

PutCall Ratio (PCR) : a barometer for investor sentiment, it is the ratio of the open-interest positions of Puts to Calls.

PCR_OI = OI_Puts / OI_Calls

A very high PCR can trigger a fall and a very low PCR can trigger a rise in in the markets. There is also a PCR for volume which is a ratio of puts traded to calls traded, representing bullish/bearish sentiment for traders.

Delivery : it is the positions carried over trading sessions in the cash market of all exchanges combined

(i.e. it goes into the demat account of the trader’s portfolio).

Delivery is to cash market like OI is to derivatives market. Spikes in deliveries are indicators that major price action can happen from that point, as it forms a support or resistance, depending on whether big positions have been built up or offloaded.

What we show in myfno.com is 3 unique things –>1. BSE + NSE delivery qty combined2. delivery% of the total both exchanges traded quantity to get an overall pic3. delivery %change vis-a-vis the previous day.. so any delivery spikes can be visible if delivery_chg>100%

Albeit its simplicity, it is a very powerful indicator, as it actually gives a sense of where the market is heavy –> on the buy or sell side.

Remember we use the PCR of OI (open int.) and NOT volume.

Since OI by its nature itself is cumulative, (i.e. builds up over trading sessions) and has the inherent property of quantifying positions being ‘open’ i.e. how much money is at stake.

So, any pressure from either bulls or bears can take the market in their direction.
It is just that who has the upper hand & takes the lead, and of which we can get a sense of understanding through the magic of PCR 🙂

My observations are highlighted in the picture below.

the magic of PCR

NOTE: Like any other indicator, this is not to be seen in isolation, but used as a confirmation along with other parameters to confirm any view on the market.

Today on 18 Sep 2014, Markets again went up almost 2%.. but just see what was happening in PCR ( a U-turn) a day before from 16th to 17th sep. which is generally a signal of trend reversal in the making –>